Digital Nomad
Digital Nomads and US Taxes: What the Foreign Earned Income Exclusion Increase Means for 2026
With the Foreign Earned Income Exclusion rising for 2026, digital nomads should revisit their housing, income, and residency planning to maximize savings.
By NomadicTax Research Team • 5-8 min read • November 18, 2025
## What’s Changing: FEIE for Tax Year 2026
The IRS has raised the Foreign Earned Income Exclusion (FEIE) limit from **$130,000 in 2025** to **$132,900 in 2026**. This means qualifying expats or digital nomads may exclude more of their US-earned income from federal taxes. ([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
## Who Qualifies & Basic Rules
To claim FEIE, you must:
- Be a **US citizen or resident alien** living abroad,
- Meet either the **bona fide residence test** or **physical presence test**, and
- Have foreign earned income (nonITEMIZED income earned abroad).
The exclusion applies only to **earned income**, not to unearned income like investment returns, capital gains, or pensions.
## Optimizing for 2025-2026: Planning Tips for Nomads
### Claiming FEIE and other related benefits before rate change
Even though the FEIE rises in 2026, income earned in 2025 must use the 2025 limit ($130,000). If you expect to earn significantly more in 2026, structure salary increases or income projectably to align when the higher FEIE applies.
### Housing Exclusion & Deduction
If eligible, nomads may also claim the **foreign housing exclusion or deduction**, which can further reduce US taxes. It’s based on housing costs above a base amount and subject to limit set by IRS Notice each year. For 2025, limits vary by location. ([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
### Foreign Tax Credits vs. FEIE
For those in high-tax countries, consider electing the foreign tax credit (FTC) instead if it delivers greater savings than FEIE + housing deduction. Modeling both approaches is essential.
## Practical Example
Sarah, a US citizen working remotely in Thailand, expects foreign earned income of $135,000 in 2026. She qualifies under the physical presence test. She excludes $132,900 under FEIE, reducing taxable income to ~$2,100 plus any housing exclusion she is eligible for. Without FEIE, she’d pay US tax on the full $135,000. Planning to defer or reallocate income around year end could make a difference.
## Action Steps for Digital Nomads
- Determine eligibility (residence test or physical presence test) now to anticipate 2026 claims.
- Keep meticulous records of income, housing costs, travel dates.
- Make forecasts for income levels and tax withheld; adjust payroll or invoicing to optimize FEIE utilization.
- Consult with cross-border tax professionals especially if your tax treaty or local tax system interacts with US taxation.
By tracking these changes and planning in advance, digital nomads can significantly lower their US tax obligations while staying compliant and avoiding surprises.